The labour market report for March left mixed feelings, as it did not confirm the slowdown in employment growth that seemed to be evident in a number of other reports (initial jobless claims, ISM in the service sector, JOLTS job openings, etc.). Therefore, it was expected that the US inflation report for March would clarify the fate of the 25 bps. rate hike by the Fed, which is currently the key factor of uncertainty affecting the search yield in the short-term. US inflation data came out today, and the market reacted positively to it, as the overall inflation rate (headline inflation) was lower than forecasts by 0.2%. The S&P 500 futures jumped above 4150 points after the release, EURUSD approached 1.10, and gold buyers now feel much more confident buying the asset above $2K per ounce. To draw a conclusion about the sustainability of the positive market reaction, let’s take a look at the behaviour of individual components of CPI:

The table shows that the main contribution to the decline in overall inflation was made by energy resources, used cars, and medical services – their prices decreased by 3.5%, 0.9%, and 0.5%, respectively. However, the inflation of rental housing prices (this component “weighs” more than 30% in CPI) although slowed down, remained at a fairly high level – 0.6% MoM. That is why core inflation, which the Fed considers a more informative indicator to determine the trend in consumer prices, was 0.4% in monthly terms and contained no surprises.

Despite the positive market reaction, further development of risk appetite, in my opinion, is in question, since the verdict on the Fed’s decision at the upcoming meeting was not made by market participants, even after the release of such an important indicator as CPI. The reason is obvious – the decline in inflation is primarily due to the negative contribution of volatile components, which can easily change sign in the next month. The Fed, taking into account mistakes made last year, is acting extremely cautiously now, so we can’t rule out 25 bp rate hike at the upcoming meeting. This is indicated by the reaction of risk-free rates (Treasury yields to maturity) – below is the reaction of the 10-year Treasury bond yield to CPI. There was initially a downward jump, but over the next two hours, there was a rise almost to the levels preceding the release of CPI:

As for the other data points, yesterday’s NFIB report beat expectations with the optimism index rising to 90 points (forecast was 89.5). China continued to increase its lending pace (expansion rates exceeded forecasts), while consumer inflation in China slowed to 0.7% YoY in March, according to yesterday’s data. 

Later today, the FOMC minutes will be released, which will likely not go unnoticed, or rather, the market reaction will be significant given the crossroads that the Fed is currently at (at least in market perception). On Friday, the economic situation in the US will be further complemented by data on retail sales and the PPI index.